Bond yields ease off earlier highs as market gauges Fed risk

NEW YORK – US Treasury yields were little changed on Monday, retreating from earlier highs as markets weighed the revelation by Federal Reserve Chair Jerome Powell that the central bank had been threatened with a criminal indictment over a building renovation project.

Powell said late Sunday the Fed had received subpoenas from the Justice Department last week pertaining to remarks he made to Congress last summer over cost overruns for a USD 2.5 billion building renovation project at the Fed’s headquarters complex in Washington, rekindling concerns about the Fed’s independence and the credibility of US assets.

The move was the latest in a series of actions by US President Donald Trump aimed at pressuring Powell, who is scheduled to step down from his post in May, and the central bank into lowering interest rates. Many investors feel such pressure could undermine the Fed’s independence, seen as a cornerstone of the US financial system and economic policy foundation.

“Anytime you have a new angle on something, the market reads it, trades on it a little bit, it has to digest it, and then it realizes this is just new news that’s consistent with prior events that have come out,” said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

“It feels as if the Fed is a tough institution to break, and so this is going to keep going on, though it’s not going to go away, the persistence will probably be there, and the market is just going to have to take it in stride.”

The yield on the benchmark US 10-year Treasury note edged up 0.6 basis points to 4.177% after climbing to 4.207% on the session.

The 30-year bond yield advanced 0.9 basis points to 4.828% after declining 4.5 basis points last week, its biggest drop since October.

Barnes said yields have been trading in a somewhat tight range over the past four months, holding near the top end of that range as economic data has indicated the Fed does not need to rush into additional rate cuts, which has exerted some upward pressure recently.

Employment data on Friday showed the US economy created fewer jobs than expected in December, but it was not weak enough to alter market expectations for just two rate cuts from the Fed this year.

Markets are awaiting inflation readings in the form of the consumer price index (CPI) and producer price index (PPI) this week to gauge the potential path of interest rates from the Fed. Those expectations showed little reaction to the subpoenas, with CME’s FedWatch Tool showing a 26.1% chance of a March rate cut, down from 27.6% in the prior session.

The two-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, shed 0.1 basis point to 3.539%.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 63.6 basis points.

An auction of USD 58 billion in three-year notes and USD 39 billion in 10-year notes was seen as solid by analysts. Demand for the 3-year was 2.65 times the notes on sale, slightly higher than average, while the 10-year saw demand of 2.55 times, roughly average.

More supply will come to the market on Tuesday when an additional USD 22 billion in 30-year bonds will be auctioned.

Trump’s actions come roughly two weeks before his effort to fire Fed Governor Lisa Cook will be argued before the Supreme Court. Market participants are also awaiting the Court’s decision on the legality of Trump’s sweeping tariff announcements, which could come this week.

Federal Reserve Bank of New York President John Williams is scheduled to speak later on Monday.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.357% after closing at 2.335% on Friday, its highest in a month.

The 10-year TIPS breakeven rate was last at 2.289%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak, additional reporting by Amanda Cooper in London; Editing by Peter Graff, Susan Fenton, and Deepa Babington)